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California to endure slow recovery, economists predict

June 16, 2011

Despite small improvements in consumer confidence and a slight uptick in the leisure and hospitality sector, the economic recovery in Orange County and California will barely crawl forward, according to the Economic Forecast Update released today by the A. Gary Anderson Center for Economic Research at Chapman University.

Blame lackluster housing and job numbers, said Esmael Adibi, Ph.D., director of the center and one of the chief experts who prepared the report, presented to a sold-out crowd of 850 business people, local leaders and policy-makers at the  Hilton Orange County/Costa Mesa.

“We will not get the real recovery in home prices unless we get significant job creation,” Dr. Adibi said. Moreover, banks are still backed up with foreclosure processing, and housing prices will continue to drop.

But next year will bring gradual improvement and “continuing recovery,” said Chapman President Jim Doti, the Donald Bren Distinguished Chair of Business and Economics and founder of the Chapman forecast. Among the positive signs for the local economy is that rental vacancies have dropped 1.6 percent and show indications of dropping further, President Doti said. That’s an important indicator that family formation is growing, a trend that will carry over into the housing and consumer markets, he said.

And while the recovery process faltered during the aftermath of Japan’s tragic earthquake and tsunami disaster, the rebuilding process there will benefit California, according to the forecast.

“The rebuilding effort is going to be very positive for California — not just manufactured goods, but also food stuff,” Dr. Adibi said, explaining that salt water from the tsunami had damaged some of Japan’s agricultural land.

Other specific highlights from the report:

  • Housing prices declined 4.3 percent during the first quarter. Continued declines  will increase the number of foreclosures and distressed properties, placing pressure on the banking and financial system. Even more damaging to the economy would be the negative wealth effect resulting from lower housing prices.
  • Housing prices in the nation will continue to depreciate, declining 2.7 percent in 2011 and an additional 1.4 percent in 2012.
  • On an average annual basis, the total number of payroll jobs in Orange County will increase by about 20,000 jobs in 2011 and 30,000 jobs in 2012. This translates to growth rates of 1.5 percent in 2011 and 2.2 percent in 2012, roughly the same as California’s job growth projection.
  • As the economy picks up steam by year-end, the Fed will increase the federal funds rate. Chapman forecasters estimate that will happen, at the earliest, in the first quarter of 2012, and are forecasting an increase in the fed funds rate from 0.2 percent to 1.8 percent by the end of the year. Long-term interest rates, like the 10-year treasury bond, will increase 100 basis points, from 3.5 to 4.5 percent.

The forecasts are generated by the Chapman Economic Model, created in 1978 by Dr. Doti and his students. It was the first quarterly econometric model for a metropolitan area and is still used to create the annual forecasts and updates.

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